Chevron faces increasing challenges from Ecuador judgment

Ultimately, one must contemplate whether continuing to attack the same problem the same way with the same team can expand the risk to something far greater and more complex than what it was originally.

By Steven R. Donziger|September 24, 2014 at 08:00 AM

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Editor’s Note: InsideCounsel has recently published two parts (one and two) of a series from Gibson Dunn attorneys, analyzing the firm’s involvement with Chevron in the case Donziger v. Chevron. The opposite side of the case, lawyer Steven R. Donziger, requested the opportunity to respond. Below is that response.

Chevron’s wave of lawsuits related to the $9.5 billion Ecuador judgment over ecological damage to indigenous villagers have been in the courts of several countries for almost five years. The immediate results of this expensive and perhaps unprecedented litigation strategy – involving at least 60 law firms and 2,000 legal personnel — can now be assessed with a reasonable degree of certainty. The results for Chevron are complicated at best.

If the goal of the company was to defeat its liability in Ecuador, it thus far has failed. Business and legal problems related to the Ecuador judgment, even with a recent ruling by a U.S. judge in favor of the company, show little sign of abating and continue to multiply across jurisdictions as described in detail below.

These risks include enforcement actions targeting strategically important company assets in Canada, Brazil, and Argentina. Chevron’s non-jury private RICO injunction likely will be tossed on appeal, thereby damaging the crown jewel of the company’s defense strategy and opening up the United States to further enforcement actions by the villagers. (The Second Circuit quickly reversed an earlier iteration of the same injunction in 2011.) Chevron also faces the uncertainty of not knowing when, where, or even whether more such actions will be filed in other jurisdictions.

In short, contrary to what is claimed by the Chevron’s lawyers, the Ecuador case can be seen as a cautionary tale for companies that face significant environmental liabilities. Yes, there have been benefits to Chevron in tying up its adversaries with what the company openly touts as the “lifetime of litigation” strategy. Chevron effectively used laws designed to facility discovery for foreign proceedings. And the company no doubt succeeded in damaging me and other lawyers personally, which I believe continues to be one of its main goals.

(For the record, I categorically reject Judge Kaplan’s findings that I committed RICO violations; my appeal is pending; eight separate appellate judges in Ecuador disagree with Judge Kaplan and have affirmed the validity of Chevron’s liability.)

There are significant detriments to Chevron from its strategy, regardless of my own fate or the ultimate disposition of Judge Kaplan’s ruling. Consider:

Chevron lost in its preferred court: The Ecuador trial court ruled against the company in February 2011; a three-judge appellate panel unanimously affirmed in 2012 after a de novo review; and five-judge panel from Ecuador’s highest court unanimously affirmed in 2013. Eight separate appellate judges in Ecuador rejected Chevron’s legal and factual arguments concerning “fraud”. Further, seven U.S. federal appellate decisions also have ruled against Chevron’s “fraud” allegations in the context of discovery disputes.

Substantial Chevron assets are in play: Chevron tried to coax Ecuador’s government to extinguish the claims of the villagers so the judgment would not become final and therefore enforceable in other jurisdictions. The company even tried to end-run the plaintiffs by floating a $700 million settlement offer to the government. This strategy failed. The communities secured a final judgment and quickly filed enforcement actions, starting in Canada in May 2012. This action in particular is progressing far more rapidly than Chevron is letting on.

Chevron faces payment of 100 percent of the judgment: Chevron now faces a possible enforcement trial in Canada, a country where its subsidiaries hold roughly $15 billion of assets. Canada’s Supreme Court will hear argument in December on whether the villagers can proceed to trial. If the villagers prevail, yet other Commonwealth countries like Australia (where Chevron is developing the world’s largest offshore natural gas field) will be in play.

Interest is running: As Chevron continues its blocking maneuvers, statutory interest runs on the underlying judgment. It would not be surprising to see the liability surpass $12 billion by end the end of 2015. Further, costs in terms of reputational harm, business disruption, distraction to management, shareholder dissent, and lost opportunities threaten to be a drag on performance.

Chevron is in open conflict with the government of Ecuador: Chevron is engaging in open political conflict with Ecuador’s OPEC-member government. Ecuador’s President (Rafael Correa) is one of the most popular in Latin America. Yet Chevron sued Ecuador via a closed-door international arbitration proceeding to obtain a taxpayer-funded bailout (from Ecuadorian citizens) of its obligations. Ecuador has retaliated by launching a major diplomatic offensive against Chevron, calling on other nations to engage in a joint effort to hold the company accountable. That Chevron would find itself warring with a U.S. ally and commercial trading partner with regional diplomatic implications cannot be good for business.

Distraction to Chevron’s management: CEO John Watson recently was forced to fly across the country to be deposed in New York for an entire day. Also deposed were the company’s deputy general counsel, chief scientist, and executive vice-president for policy and planning, among others. The case is obviously a major distraction to company management; two lawyers for Chevron previously had been indicted in Ecuador. And there are further risks: I believe we have viable legal claims (including for defamation) against Chevron executives.

Chevron’s RICO judgment in New York is unlikely to survive: Chevron’s RICO case – a flawed line of defense to begin with, given that no U.S. judge has the power to block foreign enforcement actions — faces uncertain prospects on appeal. (The many flaws are outlined in the appellate briefs available at www.stevendonziger.com.) Judge Kaplan relied heavily on testimony from an admittedly corrupt Ecuador judge to whom Chevron promised more than $2 million in benefits. Chevron had so little confidence in its evidence that it dropped all damages claims on the eve of trial. Even if upheld, Judge Kaplan’s decision is not binding in other countries and could backfire against Chevron, given the court’s evidently pro-American biases.

BP’s liability hurts Chevron: The fact BP voluntarily and without a trial committed $20 billion to compensate the victims of less impactful Gulf of Mexico spill further highlights Chevron’s stinginess. BP thus far has paid out $27 billion in claims and fines, with more to come given Judge Barbier’s recent ruling that the company committed gross negligence. Chevron’s $9.5 billion liability in Ecuador for a problem it created deliberately is a modest amount given the magnitude of the damage and the decades-long harm.

Chevron’s fundamental strategy has been to use lawsuits and the threat of lawsuits to drive away lawyers, scientists, financial supporters and other allies from helping the villagers. Chevron CEO Watson was blunt about the strategy in a recent interview: the case will end, he said, “when the lawyers give up.” While Chevron’s strategy has had some successes – the withdrawal of the Patton Boggs law firm this year being a notable example – the reality is that many talented commercial lawyers and supporters around the world are standing by the villagers.

Among them are Alan Lenczner, one of Canada’s most renowned litigators who represents the Ecuadorians in their enforcement action in Toronto; Sergio Bermudes, one of Brazil’s top legal scholars who is helping the villagers pursue Chevron’s assets in that country; Deepak Gupta, a rising appellate star in the U.S. who represents me on appeal; Burt Neuborne, a law professor from New York University who represents the Ecuadorian villagers; and John Campbell and Justin Marceau, two law professors from the University of Denver who also represent me along with several law students.

The villagers also count on Russell Deleon, a London-based businessman who helped to finance the case; Ben Barnes, the former Lieutenant Governor of Texas; and Karen Hinton, a press spokesperson and former official in the Clinton Administration. Celebrities such as Brad Pitt, Sting, Trudie Styler, Roger Waters, Cher, Mia Farrow, Don Cheadle, Bianca Jagger and others also have backed the communities. Our team seems to be growing in strength despite — or maybe because of — Chevron’s substantial expenditures and aggressive approach.

As for the merits of the case, let us be clear: our team fully rejects Chevron’s allegations of “ghostwriting” and ”fraud” in the judgment. The only courts to actually hear all of the evidence of Chevron’s misconduct — those in Ecuador — also have considered and rejected the same complaints. During the RICO trial, Judge Kaplan refused to consider the scientific evidence relied on by Ecuador’s courts. He also refused to read the Ecuador trial court record or the decisions of Ecuador’s appellate courts. In my mind, he was hostile and closed-minded throughout the proceeding and behaved in a fashion most unbecoming for a judge.

I have worked on the Ecuador matter since shortly after graduating from law school in 1991. Contrary to the wishes of Chevron’s CEO, the members of our legal team have no plans to retreat until Chevron is held accountable for its misconduct as found by the courts in its preferred forum. We are tenacious litigators. It is also obvious that Chevron is beset with hubris and has for years underestimated the strength of its litigation adversaries.

For corporate counsel, the costs and benefits of Chevron’s fight must be considered carefully. Open-ended litigation based in part on a crusade against “activist” contingency-fee lawyers is not always the best option. Filing more than 30 discovery actions in 25 federal trial courts and issuing subpoenas to more than 100 people — as Chevron did to adversary counsel, shareholders, and environmental activists — can create downside risk by sending matters down a rabbit hole of endless litigation. Chevron also has openly attacked elected officials in Ecuador and the U.S. who have called on the company to settle the case. In such a situation, the cries of the people affected — not to mention the interests of the company — can too easily be forgotten or subsumed to the battle itself.

Ultimately, one must contemplate whether continuing to attack the same problem the same way with the same team can expand the risk to something far greater and more complex than what it was originally.

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